A Price War Arrives in the Grocery Aisle

Wal-Mart feels pressure to lower its grocery prices–and that doesn’t bode well for the rest of the industry.

Food costs are finally receding, for the first time since 2009, and companies like Kraft and Campbell Soup, as well as the stores that sell their food, are likely to use this long-awaited relief as a chance to discount items in hopes of boosting sales.

According to data from Nielsen, U.S. grocery sales volume has been steadily eroding since April, and that trend is expected to continue in to next year.

As a result, Wal-Mart is getting more aggressive with its grocery prices, hoping good deals will boost sales, analysts said on a conference call with Campbell executives Thursday. Wal-Mart previously admitted its food sales last quarter weren’t as high as expected because of lower prices for its dry groceries, frozen foods, snacks and beverages—with the exception of alcohol, of course.

Campbell CEO Denise Morrison said it’s true the food industry “has been a little bit less robust” lately, and that Campbell ended the quarter with excess inventory sitting on grocery shelves. She said Campbell is now going after sales “pretty aggressively,” because after all, “people still have to eat.”

Some analysts worry that commodity deflation, at a time when sales are weak, will create the perfect storm for a price war in grocery aisles. Wells Fargo analyst John Baumgartner said that’s what happened from mid-2010 through 2011.

In recent weeks, the food industry again “has demonstrated renewed weakness, and at an accelerating rate,” he said. “And as such, we would not be surprised to witness food manufacturers increasing the levels of price promotion” over the next 12 months.

Kraft and Kellogg have both pointed to heavier promotions by rivals like General Mills and Mondelez as hurting their sales in the last quarter. Campbell said Thursday it has had to spend more money on promotions recently because of the “battles” it is fighting in the juice aisle with its V8 line. And even still, that business had disappointing sales in the latest quarter.

Kraft said the same of its salad dressing, and Kellogg of its cereal. However, Kraft made it clear it won’t get caught in a price war, because it doesn’t want its profit margin to suffer. CEO Tony Vernon said he will let the market “duke it out.”

Wells Fargo says that Mondelez is perhaps the best situated to navigate through the heavy discounting, because only 17% of its business comes from the U.S. On the other hand, Campbell, which reported underwhelming quarterly earnings Thursday, is likely the most at risk over the next year, Wells Fargo notes, citing that about 80% of Campbell’s U.S. sales are in categories that have historically seen elevated rates of price promotions.